Under an assignment of accounts receivable arrangement, a lender agrees to forward funds to a borrower in exchange for the borrower assigning certain of its receivable accounts to the lender. If the borrower does not repay the loan, the lender has the right to collect the assigned receivables. The receivables are not actually sold to the lender.
The amount loaned is usually a percentage of the outstanding receivables in the accounts assigned to the lender. The exact terms may vary - for example, the lender may require that all receivables be assigned to it. Under this arrangement, the borrower pays interest on the loaned funds, as well as a service charge. In essence, the assigned receivables act as collateral for the loan. The borrower may choose to separately classify assigned receivables in a different asset account, to clarify the extent of the arrangement with a lender.
This type of financing is expensive, and so is only considered by entities that have failed to obtain less expensive forms of financing. It is typically used when a company is not sufficiently capitalized or is growing rapidly, and so does not have enough cash on hand to fund its operations.